Has anything changed on Wall Street?

posted at 11:21 am on May 14, 2012 by Ed Morrissey

Recently, Barack Obama has refrained from mentioning Dodd-Frank as one of his big accomplishments as President. That’s fortunate, because had Obama used that as a campaign claim this month, the huge loss taken by JP Morgan and one-time Obama ally Jamie Dimon would have done serious damage. As it is, Politico wonders whether Obama might have a big problem convincing voters that he’s done anything significant to address the underlying issues that created the 2008 financial-system collapse:

The giant $2 billion trading loss at JPMorgan Chase highlights a central problem in President Barack Obama’s case for a second term: Four years after the financial crisis nearly brought the nation to its knees, very little appears to have changed.

No high-profile bank executives are in jail. Special multi-agency task forces to go after financial fraud and mortgage market abuses appeared in State of the Union addresses, only to issue a few news releases and mostly vanish from public view.

And now one of the largest banks in the United States, headed by a Democrat and operating with government guarantees, has turned in the kind of headline-grabbing, casino-style style loss that drives voters crazy and that Obama’s financial reform bill was supposed to stop.

More than two years ago, before the passage of Dodd-Frank, Dimon had already begun to distance himself from Obama, thanks to Obama’s hostility toward Wall Street. Obama and Democrats rushed to woo Dimon and others back into the fold to get some fundraising for the midterm elections. The disaffection probably will insulate Obama from his connections to Dimon. Dimon hasn’t contributed much this year, which will also help, but it calls into question the usefulness of the very expensive Dodd-Frank reforms.

The problem with Dodd-Frank is that it didn’t address the core problem of the collapse and the perceived need for federal intervention — Too Big To Fail status. Instead, the bill imposed onerous burdens on all banks and financial institutions while ignoring the growing consolidation in the industry that triggered the bailout. It nibbled at the edges, with more disclosure requirements and credit burdens while leaving JP Morgan and other giants alone. Even the more onerous burdens of Dodd-Frank impacted the largest firms least, since the economy of scale allowed them to address those at lower costs than their competitors.

If JP Morgan doesn’t go under as a result of their loss — and it doesn’t appear they will — the headlines now probably won’t swing too many votes in November. If Obama and Tim Geithner have to intervene to rescue JP Morgan and Dimon, it will be a political disaster, and Obama will be lucky to break 40% in November. But if we want to seriously guard against Too Big To Fail and eliminate the need to bail out banks in financial crises, we need to go a completely different direction than Dodd-Frank, which all but guarantees a repeat of it.

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Regulations in my view are the culprit. Banking and the Street are very close to being the most heavily regulated industries in the country. There was a time when you had to make money, you’re investment had to show a return. Now you win when you lose. The lack of risk isn’t helping. Some regulation is fine, regulation that controls investment strategy is not.

this is all a charade… no way JPM lost $2 billion as described… they will have record returns by the end of the year which will wipe out this “loss” and sweep the entire episode under the rug. IMO Obama needed JPM to take a hit to distract and give rise to the class warfare meme. Dimon having been a lackey for the Emperor-with-no-clothes dutifully went along with this farce. Pay no attention to what the other hand is doing right now

We obviously do not have the full story on this because if JPM admits where they lost the money, other banks would make things a lot worse (in ways that our President simply cannot comprehend because he knows nothing about finance).

However, from what I have read I do not believe Dodd-Frank even applies to what happened at JPM.

Nevertheless, the main point is sound. For what Dodd-Frank was supposed to do, it failed.

If Obama really wanted to remedy the problem, he would revisit a statute from 1998 (whose name I am blanking on at the moment) that allowed banks like BoA to grow exponentially. You want to stop too big too fail, break up the superbanks.

This is what happens when the banks realize they don’t have to pay for their loses. They to “Too Big To Fail”, so they can take the risky investments. If they pay good, if they need a bailout there is always the Federal Reserve. Crony.

First of all, $2 billion is a lot of money to you and me, but it isn’t to JPM. It’s a big loss for one set of trades, but Dimon said this weekend that the bank will still post a net profit for the quarter, just not as big a profit as it might have. JPM shareholders have taken a hit, but there was no risk to depositors.

It is a huge argument right now whether the Voclker rule would apply to this series of trades. The rule exempts hedging, and Dimon insists that this was a hedging trade. This is the problem with all such regulation by government — the definitions matter and are not usually clear-cut.

It seems to me this is playing out exactly like it should: the stock gets hammered, the executive in charge loses her job, and the CEO has to do a lot of damage control. Dimon has take a huge reputational hit on this, and you can be sure that his own sense of covering his ass and avoiding similar embarrassment in the future will be a stronger risk management tool than anything the government can come up with.

The problem with Dodd-Frank is that it didn’t address the core problem of the collapse and the perceived need for federal intervention — Too Big To Fail status. Instead, the bill imposed onerous burdens on all banks and financial institutions while ignoring the growing consolidation in the industry that triggered the bailout. It nibbled at the edges, with more disclosure requirements and credit burdens while leaving JP Morgan and other giants alone. Even the more onerous burdens of Dodd-Frank impacted the largest firms least, since the economy of scale allowed them to address those at lower costs than their competitors.

I’ll see your 2 billion and throw in my horse. Until all the gambling on credit defaults of all kinds ends we are screwed. These things just bring Vegas to banking and that is not what banks are suppose to do.

Ho-HUM….JP Morgan…. Lost money… unknown billions in bailout money…. poof, like magic disappears, so boring and we need grander… newer, more in depth laws and over-site to restrict unknown not currently covered activities that apparently make money exchange so many hands and accounts that virtually NO ONE has any earthy idea where any of it has gone along the way.

Just ask Jon Corzine… It’s really hard counting all that money let alone figure out where or who it goes to.

(from Bloomberg)
MF Global Bondholders Feel Duped, With Good Reason

Much has been written about the $1.2 billion that remains missing from the accounts of MF Global Holdings Ltd.’s customers, one of the most egregious violations of trust on Wall Street at a time when confidence in the behavior of financial executives is extremely low.

Blah-Blah Blah… Billions…Trillions… gazillions…..

American taxpayers still standing in a perpetual line holding the bag while bank robbers in fancy suits clean our dwindling bank accounts and futures dry as the Sahara desert.

I’m still waiting on the DOJ to begin it’s investigation of MF Global and Jon the bundler Corzine. I’m sure they’ll get right to it after the election. Meanwhile, he’s had enough time to cover any wrong doing and make off with the dough. The govt can’t protect the people when they are too busy protecting donors.

When those at the top of the ladder are not allowed to fall, the rest of us trying to work our way up are cheated out of our chance to climb up a rung. There are many qualified people waiting for their chance.

Barack Obama has refrained from mentioning Dodd-Frank as one of his big accomplishments as President.

Obama’s position on this issue:

Say speaking of Barney Frank, did you hear he was about to marry his gay boyfriend? You know who just evolved on the issue of same sex marriage and is now in favor of it? It’s just wonderful that Barney has found that special someone! Now what were we talking about?

London is the hub because there virtually zero capital requirements for investmants banks.

The sky is the limit but once you hit it, it’s a long way back down.

WisRich on May 14, 2012 at 11:46 AM

Word of the Day

Rehypothecation – The practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients. Clients who permit rehypothecation of their collateral may be compensated either through a lower cost of borrowing or a rebate on fees.

This is what happens when the banks realize they don’t have to pay for their loses. They to “Too Big To Fail”, so they can take the risky investments. If they pay good, if they need a bailout there is always the Federal Reserve. Crony.

Oil Can on May 14, 2012 at 11:39 AM

You dont think JPM paid for their losses? Did you happen to look at their stock price last week after the announcement?

And the market is exactly why there is little need for too much government over-sight or meddling. If a bank screws up, their stocks will get hammered. If they screw up like Lehman, they go bankrupt.

It’s really a shame that Obama has no clue how the economy works, or else he would understand that.

It seems to me this is playing out exactly like it should: the stock gets hammered, the executive in charge loses her job, and the CEO has to do a lot of damage control. Dimon has take a huge reputational hit on this, and you can be sure that his own sense of covering his ass and avoiding similar embarrassment in the future will be a stronger risk management tool than anything the government can come up with.

rockmom on May 14, 2012 at 11:47 AM

Five years ago, you would have been right

Today, the markets are currently trading at historically low volumes because High Frequency Trading systems are now colocated on the same server backbone (fiber optic connections that enalbe them to place/execute/remove ask/bid positions in less than a millionth of a second) as the NYSE et al exchange servers. Most of the HFT systems operate as dark pools of liquidity (i.e. their own non-reporting exchanges which execute client trades in complete ‘darkness’ to avoid other traders being aware of who is trading what for how much and being able to speculate on WHY)

The dark pools of liquidity get to decide how many of their trades they will report to the public exchanges. On any given day, the best current estimate is that the dark pools of liquidity are roughly 70% of the daily trades reported on the NYSE, as an example.

FYI, the major banks all have some ownership position in the various HFT systems and the dark pools of liquidity.

I have my doubts that a scandal at a big bank can in any way be good for Republicans and Romney — even if Dimon can be shown to be Obama’s pal, and even if Obama’s hypocrisy in accepting huge funds from Wall Street while bashing it can be broadcast.

The scandal feeds into the meme of “you know, this capitalism thing doesn’t work very well”; Romney, the Baneful Bain Bully Boy, is the arch-capitalist; and Julia is condemned to an Auschwitz-like existence without a friend at 1600 Pennsylvania Avenue.

No, I don’t think they paid. Except for IndyMac and Lehman (for some reason) most of these banks received bailouts in 2008 and 2009. The bailout of AIG was a backdoor bailout of Goldman Sacks. There where should have been major bank bankruptcies in 2008 and 2009. The mergers where funded by TRAP and the $7.7 worth of secret fed loans.

In addition, TBTF banks receive over night loan at .25% interest and then loan the money at 4%. They also make extra profits the Federal Reserve purchase Mortgage Backed Securities and US Treasuries.

In 2009, the Federal reserve purchased bad debt from the banks.

There their HAMP and HARP programs default risk was transfered from the banks to the tax payer.

The continued use to all the FHA quick refi program, so upside borrowers can refi with less FHA on loans with the highest re-default settlement.

This bank “settlement” which protected the banks from lawsuits. I’m split on this one, if you don’t pay your mortgage then get the f*&* out. However, they still need to follow legal procedure.

The US Treasury has it’s HHF program another $7.6 billion dollar give away.

Credit defAULT SWAPS. I did not understand them in 2008 and still don’t.

gerrym51 on May 14, 2012 at 11:59 AM

Ok …

Credit Default Swaps – A swap designed to transfer the credit exposure of fixed income products between parties. A credit default swap is also referred to as a credit derivative contract, where the purchaser of the swap makes payments up until the maturity date of a contract. Payments are made to the seller of the swap. In return, the seller agrees to pay off a third party debt if this party defaults on the loan. A CDS is considered insurance against non-payment. A buyer of a CDS might be speculating on the possibility that the third party will indeed default.

Essentially, the CDS allows someone to take out insurane that “guarantees” their investment will pay off. In 2008, AIG had so many “insurance policies” extended to the banking industry that when they all came due ($ 160 billion dollars), it was impossible to pay them all off …

… so good old Uncle Sam stepped in and paid everybody 100% (i.e. their investment plus their targeted gain) rather than leting AIG go bankrupt and having the CDS’s prove to be worthless. They did this even for clients who offered to just settle for their original investment – they literally FORCED the firms that took out the CDS’s to take the gain. Most of the CDS’s holders were … the “Too Big To Fail” banks.

By the way, the idea of doing away with Credit Default Swaps would cause government interest rates on borrowing to go up because governments use CDS’s to insure their OWN defecit borrowing.

I don’t like the way the media characterizes this loss as a “mistake” or a “blunder”. This was a coolly calculated, incredibly risky, planned series of derivative transactions that lost. Big time. The idea must be that incompetence is more politically palatable than breathtakingly reckless greed.

The Federal reserve swapped 100 cents on the dollar for the declared value of Mortgage Backed Securities (MBS’s) trusts held by the “Too Big To Fail” they did this knowing full well the MBS trusts were not worth 100 cents on the dollar AND the MBS trusts had been executed frauduently during their creation.

The problem in the United States is that the Mortgage Backed Securities (MBS’s) are worth less far less than they should be because:

Many of them have involved millions of mortgages executed fraudulently with the MERS system which resulted in broken chains of title (i.e. the recovery process requires the seller to repay the original purchase price to the holder, the “banks” would have to pay par value back to the Federal Reserve and a host of other entities. This is a problem because the banks don’t have that type of capital.)

The same mortgage has been sliced and diced among multiple MBS’s. This is criminal fraud on a scale never achieved before. It is the largest applicable situation for use of the R.I.C.O. Act put in place in the early 1970’s to enable the breaking up of organized crime by allowing the seizure of not only the “illegally gotten goods” seized at the scene of a crime but ALL the personal assets of ALL of the individuals deemed to have conspired together to see the crime committed.

Both sets of crimes have been documented for easy prosecution (e.g. the facts are prima facie and any assistant D.A. should be able to get plea deals from the small fish in less than five minutes – because a conviction would take a couple of days and these dear folks would be going to prison to shower with Bubba for twenty years) by the MERS systems and all of the documentation required to create the trust documents known to us a MBS’s. In point of fact, the MERS database makes documenting the crimes committed remarkably easy.

And two months ago, the Obama Administration pushed through a settlement for $ 25 billion (actually less than $ 5 billion cost to the banks – the rest is covered under HARP and HAMP – i.e. the taxpayer)

The scandal feeds into the meme of “you know, this capitalism thing doesn’t work very well”; Romney, the Baneful Bain Bully Boy, is the arch-capitalist; and Julia is condemned to an Auschwitz-like existence without a friend at 1600 Pennsylvania Avenue.

bobs1196 on May 14, 2012 at 12:15 PM

Not At All True

The scandal is not about capitalism. The scandal is about corruption of capitalism into crony capitalism – where there is no accountability for misdeeds (i.e. Jon Corzine has not been indicted for MF Global) and the normal capitalism process of destruction of the less successful companies/investments is allowed to proceed into bankrupcy and dissolution so other better entities can take their place. (i.e. AIG, Too Big To Fail banks)

No, I don’t think they paid. Except for IndyMac and Lehman (for some reason) most of these banks received bailouts in 2008 and 2009. The bailout of AIG was a backdoor bailout of Goldman Sacks. There where should have been major bank bankruptcies in 2008 and 2009. The mergers where funded by TRAP and the $7.7 worth of secret fed loans.

In addition, TBTF banks receive over night loan at .25% interest and then loan the money at 4%. They also make extra profits the Federal Reserve purchase Mortgage Backed Securities and US Treasuries.

In 2009, the Federal reserve purchased bad debt from the banks.

There their HAMP and HARP programs default risk was transfered from the banks to the tax payer.

The continued use to all the FHA quick refi program, so upside borrowers can refi with less FHA on loans with the highest re-default settlement.

This bank “settlement” which protected the banks from lawsuits. I’m split on this one, if you don’t pay your mortgage then get the f*&* out. However, they still need to follow legal procedure.

The US Treasury has it’s HHF program another $7.6 billion dollar give away.

This system is all crony. No free market at all.

Oil Can on May 14, 2012 at 12:25 PM

That is the point, the banks didn’t pay because of government meddling. If the government let AIG, Fannie, Citi, BoA, etc.. go bankrupt, things would be a lot better right now. Instead, they only basically let Lehman go bankrupt, and saved the rest.

But like you mentioned, the government got involved, and propped up bad banks. That has had ramifications for insurance companies and banks throughout the country, and has given the bailed out banks a slap on the wrist, and tilted the playing field in their favor.

Bush and a Democratic Congress created a mess, and Obama has made it worse, while thinking he has accomplished something with Dodd-Frank.

the normal capitalism process of destruction of the less successful companies/investments is allowed to proceed into bankrupcy and dissolution so other better entities can take their place. (i.e. AIG, Too Big To Fail banks)

You don’t seem to understand. Even when banks are allowed to fail, the FDIC means that taxpayers are still held accountable for bail outs. Allowing banks to fail doesn’t prevent a speculative bubble from threatening our financial system again.

The underlying problem started when Clinton repealed Glass Steagall, basically allowing banks to trade its bank deposits on the stock market.
In the past, banks generated profits by leveraging bank deposits in the form of loans to individuals and businesses. Obviously lending is extremely important to our economy and is the traditional purpose of banks. Those loans allow small businesses to grow and create jobs.

But why should Chase only leverage its capital for lending when it’s much more profitable to “invest” in the stock market, where a position can return a 100% return in 60 days? After all, the banks are investing money that’s fully insured by the FDIC.

Many countries like Germany have completed banned this kind of behavior. It’s a testament to the lobbying power of the banks that this kind of behavior is still permitted.

That is the point, the banks didn’t pay because of government meddling. If the government let AIG, Fannie, Citi, BoA, etc.. go bankrupt, things would be a lot better right now. Instead, they only basically let Lehman go bankrupt, and saved the rest.

When banks are involved, you don’t seem to realize that even when a bank is allowed to fail, the government is still involved. When bank failures are widespread, it’s crucial to prevent banking panics and a repeat of a 1930′s depression.

The best example of how to handle bank failures occurred during the S&L crisis of the 90′s under Bush Sr. The government took ownership of failing banks and managed an orderly transition of their assets to other, healthy banks.

Bush and Obama should have done the same to Citi and other ‘too big to fail’ banks, breaking those failed institutions up and selling off their assets.

When banks are involved, you don’t seem to realize that even when a bank is allowed to fail, the government is still involved. When bank failures are widespread, it’s crucial to prevent banking panics and a repeat of a 1930′s depression.

The best example of how to handle bank failures occurred during the S&L crisis of the 90′s under Bush Sr. The government took ownership of failing banks and managed an orderly transition of their assets to other, healthy banks.

Bush and Obama should have done the same to Citi and other ‘too big to fail’ banks, breaking those failed institutions up and selling off their assets.

bayam on May 14, 2012 at 2:15 PM

If by involved, you mean as the Trustee and in the capacity of guaranteeing money in accounts, yes. If by involved, you mean giving funds to keep bankrupt companies affloat, and allowing those same companies to compete, unfairly, later on, then no.

Nothing that was done prevented a GD style collapse.

And I agree with your last point. And that is the point I have tried to make. What I think should have happened is what Romney advocated for car companies. Let these banks go into chapter 11. Then, have healty banks buy up the healthy divisions, like i-banking, and have the rest of the assets go through the bankruptcy process and either emerge as healthier entities, or go under if the rest of the assets could not survive.

Instead, we did the worst thing possible. Bailed out the banks, gave them TARP money, which has enabled them to unfairly one-up banks that never took TARP funds, and not broken them up like other companies that got too big (see the Bell companies). As a result, you have 2 billion dollar mistakes because JPM knows that if they really screw up, the Obama administration will never allow them to go under.

You don’t seem to understand. Even when banks are allowed to fail, the FDIC means that taxpayers are still held accountable for bail outs. Allowing banks to fail doesn’t prevent a speculative bubble from threatening our financial system again.

The underlying problem started when Clinton repealed Glass Steagall, basically allowing banks to trade its bank deposits on the stock market.
In the past, banks generated profits by leveraging bank deposits in the form of loans to individuals and businesses. Obviously lending is extremely important to our economy and is the traditional purpose of banks. Those loans allow small businesses to grow and create jobs.

But why should Chase only leverage its capital for lending when it’s much more profitable to “invest” in the stock market, where a position can return a 100% return in 60 days? After all, the banks are investing money that’s fully insured by the FDIC.

Many countries like Germany have completed banned this kind of behavior. It’s a testament to the lobbying power of the banks that this kind of behavior is still permitted.

bayam on May 14, 2012 at 2:09 PM

I not only understand. I completely agree with you on Glass-Steagall.

There is a LOT more I could say on this topic but I thought my posts were long and coming too close together – so I decided to hush up for a bit.

I will add however that many of the Too Big To Fail were and, in some cases, still are not banks. They were investment firms allowed to become bank holding companies so they could access the Fed discount window and sell their MBS crap to the Fed. This should be undone, the crap forced back down their throats and if they go bankrupt … their bondholders and shareholders take the loss – not the taxpayers.

Also, the FDIC does excellent work. They insure depositors up to $ 500k per account (or did they let it go back to $ 250k?) and generally find another buyer for the bank. My solution – if you are Too Big To Fail, you are too big for the FDIC to insure your depositors … a lot of money would flow down into smaller banks where it would actually be used to make loans.

Ed, you might be missing a huge point – this is all a ruse, just like Dodd-Frank (which NEVER had the intention of fixing anything). Don’t believe me, then ask yourself this one question: If JPM was really “fixing” something with this desk/trade “gone bad”, then why are they “installing” an EX-LTCM trader, Matt Zames to manage roughly $70 trillion in derivatives? If you have not a clue what/who he is, may I suggest reading When Genius Failed to get a clue about how rigged the system is and when it blows up, they are rewarded and coddled where those that defected from towing the line (cough cough, Lehman/Bear Sterns, cough) get sacrificial lamb status.

I understand the need to be topical and to place every current event in to a nice, neat package. However, this is ridiculous MSM-type bull crap. JPM is in fine shape. The tempest in this particular teapot is on the order of $2B. JPM earns on the order of 10 to 20 times that per annum!

Is it a black eye? Sure. Does it present a threat to the taxpayers in terms of having to bail out a TBTF bank? Hell no. Not close.

The only threat posed by this misstep is the political one. It is an excuse for demagogues to raise the specter of 2009 all over again and to “save” us from the nightmare that will surely happen but for their wise guidance and leadership.

Ed, by playing along with tripe like this you are serving as yet another useful idiot. Keep the incident in perspective and stop playing along with the government crowd who want nothing more than to exaggerate this mole hill to mountainous proportions. Let this “crisis” go to waste for crying out loud!